- Fitch lowers US credit rating to AA+
- Wells Fargo fails in its plan to replenish the FDIC coffers
- According to ADP, US private payrolls beat expectations in July
- Indices down: Dow 0.98%, S&P 1.38%, Nasdaq 2.17%
2 AUGUST (Reuters) – Wall Street finished lower on Wednesday, with the S&P 500 and Nasdaq Composite falling for a second straight day as investors gained a day after rating agency Fitch downgraded the US government’s credit rating took away from five months of profits.
Fitch downgraded the US from AAA to AA+ late Tuesday, citing expected fiscal deterioration over the next three years and growing public debt. Fitch was the second major agency to downgrade the country’s rating. In 2011, Standard & Poor’s stripped the country of its triple-A rating.
Reaction to the news pushed major indices lower, with the S&P 500 (.SPX) posting its largest daily percentage decline since April 25. It was also the first session since May 23 that the benchmark fell more than 1%.
Still, several major brokerage firms said the downgrade is unlikely to result in lasting strain on US financial markets, noting that the economy is stronger now than when S&P downgraded its rating in 2011.
July marked the fifth consecutive month of gains for the S&P 500 and the tech-heavy Nasdaq Composite (.IXIC), buoyed by better-than-expected earnings and hopes of a soft landing for the US economy.
However, as markets entered a seasonally weaker August, Fitch’s downgrade offered investors a chance to take a breather.
“Sometimes it’s healthy to have that digest in the market as it lowers valuations a bit and allows for dip buying,” said Quincy Krosby, chief global strategist at LPL Financial in Charlotte, North Carolina.
The chart shows that Fitch’s long-term foreign currency rating was downgraded to AA+ in 2023, following a similar move by S&P in 2011.
Rate-sensitive megacap stocks including Tesla (TSLA.O), Nvidia (NVDA.O), Meta Platforms (META.O) and Apple (AAPL.O) tumbled as the US 10-year Treasury yield rose to the highest value in almost nine months.
Tech stocks are getting premium ratings as investors anticipate earnings growth and many fear high interest rates could slow the economy and slow growth. Higher interest rates may make interest-bearing bonds an attractive alternative to stocks for some risk-averse investors, and the company’s projected cash flows are worth less in current US dollars if interest rates rise.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., July 20, 2023. REUTERS/Brendan McDermid/File Photo
The technology index (.SPLRCT) was also the worst of the 11 major S&P sectors, down 2.6%, with nine overall ending the day down.
Returns above 4% are “not what the market wants to see,” according to LPL’s Krosby, who also predicted that investors will soon look beyond Fitch’s downgrade and focus on earnings of big tech companies after the market close line up Thursday.
“The market will now be focused on Amazon.com Inc (AMZN.O) and Apple tomorrow afternoon and then Friday on the payroll report and we’ll say goodbye to Fitch,” Krosby said.
The Dow Jones Industrial Average (.DJI) fell 348.16 points, or 0.98%, to 35,282.52, the S&P 500 (.SPX) lost 63.34 points, or 1.38%, to 4,513.39 and the Nasdaq Composite (.IXIC) fell 310.47 points, or 2.17%, to 13,973.45.
Meanwhile, the ADP National Employment Report showed that private payrolls rose more-than-expected in July, suggesting continued labor market resilience that could protect the economy from a recession.
Despite persistent fears of a recession, American companies have continued to perform well. According to Refinitiv I/B/E/S, around two-thirds of the S&P 500 have already issued reports, and 79.9% have reported earnings that beat analysts’ expectations.
According to the data provider, the quarter is on track to achieve the highest rate of earnings growth since the third quarter of 2021.
On the earnings front, CVS Health Corp (CVS.N) rose 3.3% after beating Wall Street’s quarterly earnings estimate and Emerson (EMR.N) climbed 3.8% after the industrial software company updated its full-year earnings guidance had raised.
Advanced Micro Devices (AMD.O), meanwhile, slipped 7% on concerns that its targets for expanding artificial intelligence (AI) might be overly ambitious. The worries overshadowed the chip designer, who predicted a positive end of the year.
Volume on US exchanges was 11.88 billion shares compared to the average of 10.79 billion for the entire session over the past 20 trading days.
The S&P 500 posted 12 new 52-week highs and five new lows; The Nasdaq Composite posted 49 new highs and 111 new lows.
Reporting by Johann M. Cherian and Bansari Mayur Kamdar in Bengaluru and David French in New York; additional reporting by Lewis Krauskopf; Adaptation by Saumyadeb Chakrabarty, Vinay Dwivedi and David Gregorio
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